China is having an impact on the Australian Dollar

George Lucas

George Lucas

The eyes of the world are on Greece as it has the potential to undermine confidence in Europe, but China is a much bigger story, says George Lucas, managing director Instreet Investment.

“Indeed, the recent selloff in Australia is being driven by the correction in the mainland Chinese share market not so much the events in Greece,” he added.

“The Shanghai Composite Index has had its steepest three-week decline since 1992 and has now fallen nearly 30 per cent since mid-June. Investors are also complaining that the large volume of new share issues in recent weeks has siphoned off demand for existing stocks.”

“Chinese authorities are struggling to arrest the slump. They are responding with knee-jerk policy – targeting short sellers and market manipulators as well as relaxing the rules on margin lending, cutting trading fees and slowing the pace of initial public offerings (IPOs were halted for 15 months between 2012 and 2014 in an effort to boost the flagging market).”

“The risk is that the market turmoil destabilises China’s economy at a time when it is already showing signs of a slowdown. We’ve been watching this situation closely for some time, concerned that Chinese authorities may have been too slow to implement policies that would maintain the country’s seven per cent GDP growth target.”

“The Australian Dollar (which often trades as a proxy for China growth) is down to a six year low of US$0.7490.”

“But China isn’t the only force driving down the Australian Dollar. Poor retail sales data in Australia has also pushed the AUD down 1.5 per cent against the USD. It fell even lower against the Euro and Pound Sterling.”

“Against this backdrop, and following the release of mixed economic data during the past four weeks, we expect the RBA will leave interest rates on hold at 2.0% this month.”

“The Greek referendum will have little immediate impact on the Greece economy. Greeks can still only withdraw EUR60 in cash a day and there are also rumours that Greek authorities have started planning to trim consumer deposits, similar to the situation is Cyprus.”

“If a deal isn’t reached quickly, and the ECB doesn’t provide emergency liquidity, Greece will need to maintain capital controls and maybe even step them up. In this situation, the authorities might be forced to issue a parallel currency while an extended legal battle ensues over the role of the ECB and its right to pull the plug on liquidity.”

“We might also start seeing shortages in Greece as the country imports 65% of goods and services as importers won’t be able to pay offshore suppliers.”

However China will remain the bigger global story,”  he said.

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